THE GUARANTEE, A FINANCIAL TOOL AT THE SERVICE OF SMES PERFORMANCE INDICATORS

1. EUROPEAN MUTUAL GUARANTEE ASSOCIATION40, rue Washington, BE 1050 BrusselsTf + 32 2 640 16 65 info@aecm.be THE GUARANTEE, A FINANCIAL TOOL AT THE SERVICE OF SMES PERFORMANCE INDICATORS A. DOUETTE, SECRETARY GENERAL

2. CREDIT CREDIT < LATIN “CREDERE”, TO BELIEVE… CREDIT IS THE MATERIALIZATION OF A TRUSTFUL RELATIONSHIP BETWEEN A LENDER AND A BORROWER THE LENDER, HOLDER AND RESPONSIBLE OF PUBLIC SAVINGS, CANNOT AFFORD TO LOSE MORE THAN ONE TRANSACTION OUT OF 100 OF THE SAME VALUE → 1st PROTECTION: THE WILLINGNESS OF THE BORROWER TO REPAY HIS LOAN → 2nd PROTECTION: THE EXISTENCE OF SECURITIES WHICH PRIORITIZE HIS LOAN IN CASE OF BANKRUPTCY

3. CREDIT AND SMEs 99% of the 23 million European businesses Bank = 70% of their external resources Usual managerial risks: competition, change in demand, in technology, unrecovered commercial receivables, economic cycle... Specific SME elements:, no strategic view, inconsistent financial statements, inadequate management capabilities, low equity, low profitability in lending,high cost in obtaining information Personal risks: “small entrepreneur as all round man”, health, divorce… → SME are constrained in getting formal finance  SMEs WEAKNESSES

4. A MARKET ORIENTED APPROACH TO SME FINANCE • Focuses on reducing the risks and transaction costs associated with lending to SMEs • → Risk sharing techniques • → Preparation of the credit file / accompaniement and • follow-up (consulting pre and post granting the credit) • Strengthens the capacity of financial institutions to serve smaller clients, promotes sustainable lending to SMEs • → Learning process : what is a SME? how is it managed? • → Less bureaucratic procedures, simplified credit file, easier • decision making, accessible language…

5. THE GUARANTEE • GUARANTEE < OLD GERMAN “WARJAN”, “WARRANCE” = “SOMETHING GENUINE, TRUE” • →English “warantee”, French “garantie”… • →symbolic: colour red, a precious dyeing plant “la garance” • IN THE FINANCIAL INDUSTRY, the guarantee is the combination of two techniques • →FINANCIAL ANALYIS: a professional assessment of the creditworthiness of the borrower + the exposure, providing an added value to the decision process made by the lender • →JURIDICAL MACHINERY: the legal provisions that rule the rights and obligations of a personal security offered as a partial and complementary collateral substitute.

6. EFFECTS OF THE GUARANTEEPERFORMANCE INDICATORS • Market relevance of the instrument • Economic additionality • Financial additionality • Leverage • Effectiveness • Efficiency

7. PERFORMANCE INDICATORSRELEVANCE • = Capacity to fill / reduce market gaps in SMEs lending • Criteria • CGOs in countries with low level of financial intermediation: Offer a general incentive to lend for bankers who usually express a general reluctance to address SMEs markets and have unaffordable collateral requirements (150 to 200% of the loan amount). • CGOs in more advanced financial economies: • Much more « targeted » in addressing at the choice of the banker a range of businesses that are vulnerable (weaker financial sructure, located in less developed areas, in a threatened sector, in a risky position on the life curve, addressing the bank in the down turn of the economic cycle…)

8. PERFORMANCE INDICATORSECONOMIC ADDITIONALITY Macro-economic benefits of an efficient Credit Guarantee Organisation Criteria Added value creation (GDP) Market behaviours: new needs, new market trends, Innovation: new products, processes, management.. Productivity and competitiveness of the economy Jobs: additional employment, sliding employment Continuity: ensure the transfer of generations… Densification of the productive tissue of an economy Additional income = tax opportunities… Reconversion of depressed areas, animation of rural regions And so on…

9. PERFORMANCE INDICATORSFINANCIAL ADDITIONALITY Access to credit for applicants that would otherwise be rejected(+/- 15% credit rejections in EU)+ Access to better credit terms Reduces information asymetry and adverse selection (start-ups, immaterial investments, micro-guarantees…) by, e.g. -Qualitative assessments (complementing a quantitative analysis) -Appraisal by peers (mutual systems) Improves the lending conditions for small borrowers (gap with large firms) -Longer term loans, grace periods.. -lower interest rates, -Less collaterals by external protection CGOs might help developing institutional capacity in SME lending through changes in behavior and perception of lenders

10. PERFORMANCE INDICATORSLEVERAGE = Capacity to develop a much larger portfolio than the own funds at the disposal of the CGO - Leverage = Outstanding guarantee commitments / own funds - Multiplier =Outstanding underlying loans / own funds of the guarantor Specificity of CGOs = economic utilization of the equity, cheaper setting up with a maximum effect… How to raise the leverage ? Through a good supervision… Through diversification of risks in the portfolio Through counter-guarantees Through modulation of the guarantee rate

11. PERFORMANCE INDICATORSEFFECTIVENESS = Capacity to reach a good macro-economic performance in terms of market reach Ex: Italy: 40% of craftsmen are partners of Confidi… Criteria: Market share Number of guarantees granted How to improve the effectiveness. Combine Guarantee + Advice Improve visibility, accessibility, networking Develop complementarity with lenders Create dedicated products

12. PERFORMANCE INDICATORSEFFICIENCY = Productivity, quality of the management Linked with the structure and the critical size of a CGO Criteria: -Speed to deliver the service (intranet …) -Minimize the Cost Income ratio How to improve the efficiency? -Cutting costs (focusing on the decision making and the follow-up). -No red tape (easy application, same file as the banker..) -Under conditions, portfolio guarantee… -Formation and training of the staff…

13. Some conclusions • Beyond obvious positive performance criteria…the situation can be contrasted and variable from scheme to scheme… • Focus on: →The social + economic role : a balanced target between the macro-economic « incentive effect » and the micro-economic « Long term sustainability and growth capacity » →Not too much subsidy dependance (fair public private partnership…) →Management of the « default rate »

14. Some conclusions • No obvious benchmark • Three key elements to take into account in assessing the performance : →How (un)favourable is the environment? (law, courts, supervision, consensus between SMEs, lenders and authorities to accept a CGO) →How the CGO is designed ? (simple to put on the paper, tough to set in practice; rely on good experiences !) →How do the Board and Management conceive the strategy and the policies? (target, limits, leverage, fee, marketing… in daily management)